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Tax Tweak Could Mess Up a Deal

2/13/2005 7:00 PM Eastern

If President Bush has his way with the proposed 2006 federal budget, News Corp. chairman Rupert Murdoch could lose one of his better options for buying back the 18% voting stake in his media conglomerate that’s now owned by Liberty Media Corp.

The budget plan scales back a popular tax shelter called a cash-rich split-off, a tax efficient means of unwinding a stock interest in a company — and a potential path for Liberty chairman John Malone to sell the News shares back to Murdoch and acquire a business asset, such as a programming service, in return.

SPLIT-OFF SCENARIO

News Corp. hasn’t said publicly how it might buy back the additional voting shares that Liberty acquired last year, but some analysts have said the most efficient way could be through a cash-rich split-off.

In that scenario, News could acquire Liberty’s 327 million voting shares — valued at $5.7 billion, based on a $17.36 per-share closing price on Feb. 9 — using mostly cash.

Under the current rules, up to 90% of cash-rich split-offs can be in the form of cash, with the rest in the form of a business asset.

In a report late last year, Fulcrum Global Partners analyst Richard Greenfield said Liberty could save as much as $1.2 billion in taxes using the cash-rich split-off structure, instead of selling the shares on the open market. At the time, Greenfield speculated that Liberty would split the tax savings with News Corp.

As part of the proposed 2006 federal budget, the cash portion of such transactions would be no more than 50% of the value of the total deal.

That would mean News Corp. would have to part with a substantially larger asset, something it has said in the past that it would not do.

Earlier this month, on a conference call with analysts to discuss fiscal second-quarter results, Murdoch said no substantial discussions with Liberty have taken place.

“We’re certainly not going to be giving up any assets which we have really big plans for, nor are we going to have our cupboards cleaned out of all of our cash,” Murdoch said on the Feb. 2 conference call. “I think there is plenty of room to talk.”

In an interview last week, Greenfield said if the federal budget restricts the tax efficiency of a cash-rich split-off, it could mean one of two things: a deal has to be done quickly or no deal will get done at all.

“This puts pressure on Liberty to get a transaction done soon,” Greenfield said in an interview last week. “Investors are increasingly focused on Liberty unwinding its assets over the next couple of years. The most tax-efficient way to unwind a good chunk of its News Corp. ownership would be through a cash-rich split.

“That cash-rich split would become far more difficult if this legislation passed. In turn, as soon as the Fox transaction closes, there will be a tremendous push, probably driven by Liberty, to affect a transaction quickly.”

News Corp. made a tender offer for the remaining 18% interest in Fox Entertainment Group it doesn’t already own last month in a stock swap valued at $5.4 billion at the time. Last week, News Corp. extended the deadline for shares to be tendered from Feb. 22 to March 4.

ONUS ON LIBERTY

Liberty would have to initiate any deal, said Greenfield, because News Corp. appears to be under little pressure to get back that voting stock.

“There’s not enough need for News Corp. to do this,” Greenfield said. “We don’t believe that John Malone wants to run or take over News Corp. This was a tax-efficient solution for Liberty to get out of its News Corp. stake.”

Cable operators and programmers are no strangers to the cash-rich split off structure.

Back in July, Liberty initiated a cash-rich split-off with Comcast Corp.

In exchange for the 120.3 million Liberty shares Comcast acquired when it sold Liberty its interest in cable-shopping channel QVC Inc., Comcast received $545 million in cash and Liberty’s interest in two cable networks: 10% of E! Networks and all of International Channel Networks.

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